Oil Companies Are Not Spending Windfall Profits on Climate
Oil companies don’t make sudden decisions as consumers battle high fuel prices, and politicians rush to reduce them. That’s because, after years of low fuel prices, they are now enjoying a financial upswing, as demonstrated by lucrative first quarter earnings reports released in late April and early May.
Late 2021 saw oil prices rise due to shortages. However, they were boosted after Russia’s invasion of Ukraine in February. Chevron’s profits increased to $6.3 billion last quarter from $1.4 billion one year ago. Exxon Mobil’s profits increased by more than two-thirds in the same time frame to $5.5 billion. The numbers were also rosy for European firms—even among those that took a hit from severing ties with their Russian investments. TotalEnergies, a French company, netted nearly $5 billion, a 48% boost from last year, while U.K. companies Shell (at $9 billion) and BP (at $6.2 billion) are hitting profit levels that they haven’t seen in about a decade.
For the most part, major oil companies aren’t going to pour these billions of dollars into climate-mitigation investments like carbon capture technologies. They have not indicated any plans to increase oil production, even though heads of states requested it. They have not taken any action to increase oil production, and this has prompted the U.S., European and other countries to reduce fuel costs and release their oil resources to replace Russian oil, and to import liquid natural gas from elsewhere. Despite those government efforts, oil prices have stayed above $100 per barrel, sustaining an influx of money to fossil fuel companies that are passing it on to stockholders and investors in the form of increased dividends and share buyback initiatives that drive up companies’ share values.
A one-page analysis Wall Street Journal The nine largest U.S. oil companies spent 54% less in dividends and share repurchases during the first quarter of 2013 than they did in new oil development. The latest report on the top 20 U.S. oil corporations, published jointly by Friends Of The Earth (environmentalist group) and Bailout Watch (consumer watchdog groups), found that $56 Billion was spent in share repurchases and dividends between October and November. That compares to $11 billion for the same period nine months prior.
“The industry is effectively transforming a humanitarian disaster and pain at the pump into Wall Street returns,” says Lukas Ross, a program manager at Friends Of The Earth, and co-author of the report. “Exploiting the war in Ukraine is a desperate play on the part of these companies to salvage their reputation with investors.”
Mark Finley, a fellow in energy and global oil at Rice University’s Baker Institute for Public Policy, who was formerly an economist at BP, characterizes the situation differently. He says that it wouldn’t make good business sense for oil companies to immediately invest their quarterly profits given the current geopolitical instability. Because crude oil is a global commodity and individual oil companies do not set the price, executives have to make business decisions based on what they can control and hedge against what they can’t. Investments could take years to pay off and there’s no incentive to change course in flush times.
“These companies are thinking in decades,” Finley says. “None of these companies are going to jump in with both feet on one or two quarters of data and say, we’re completely changing everything.”
Industry executives are well-aware of the dangers that can quickly arise. The Trump and Obama administrations saw a boom in fracking, which led to an increase in demand. This drove down the prices. Companies suffered record-breaking losses as a result of the pandemic and were forced to reduce their debt and invest less to ensure they received dividends. It resulted in a limited increase in oil and clean energy. According to an International Energy Agency report, 1% of the capital investments made by the oil industry was for clean energy investments. That figure will drop to just 4% by 2021.
Even in light of recent earnings, oil companies are still largely practicing the so-called “capital discipline” strategies that they implemented during their leanest times, but Ross expects that the industry is positioning itself to capitalize on the political environment to ensure its long-term relevance. In particular, he points to the American Petroleum Institute’s appeal for expedited fossil fuel infrastructure permits and more natural gas exports, which President Biden then agreed to.
“The oil and gas industry, in addition to trying to seize this moment for all the profits it can squeeze, is trying to lock in another generation of extraction emissions,” he says.
Finley also thinks that companies will benefit as politicians look for ways to stabilize the energy market—though he doesn’t think that it will necessarily come at the expense of a broader shift to green energy.
“We used the words ‘energy transition,’ and in our minds we jumped to the end state. We figured that if we’re not using fossil fuels in a future world, then we don’t need to invest in fossil fuels,” he says. “But you need a functioning energy system that delivers secure, affordable, reliable energy at each discrete point in time between now and that end state. The reality is that fossil fuels are the only option. This crisis could be avoided if we invested more in oil and natural gas. more of a focus on a transition.”
That may seem paradoxical, but it’s clear that politicians feel both ire at the industry’s blockbuster quarterly profits even as they acknowledge the world’s dependence on the products it sells. Take into account that the U.S. Congress has been asking oil executives questions about their gas prices, while Joe Biden, President of the United States, supports drilling leases to federal land. This is contrary to a 2020 campaign promise. At the same time across the Atlantic, European leaders considered imposing a “windfall tax” on oil companies for their recent fortunes while U.K. Prime Minister Boris Johnson has called for more drilling in the North Sea.
Dieter Helm, professor of economic policy at the University of Oxford who has written several books on the world’s addiction to fossil fuels, says that policy shifts tied to the industry’s short-term wartime profits aren’t likely to make or break 2050 net-zero climate targets. What’s more, fixating on them loses sight of the much bigger picture.
He points out that western oil companies are only one part of the industry; national oil companies like Saudi Aramco control more than half of global oil and gas production—but they haven’t been under the same pressure to decarbonize as their free-market counterparts. The trends occurring in advanced countries may be overshadowed by the growing dependence of developing countries on fossil fuels. And finally, he says, there hasn’t been a concerted effort to stop the destruction of the soils, forests, and water sources that naturally sequester carbon dioxide.
“This is a tragedy, but this is the reality of what’s actually happening, as opposed to this story—which I wish was true but isn’t—that we’re all in this together on a net-zero transition and we’re going to crack climate change within 28 years,” he says. “There’s no path that we’re currently on which looks anything like that.”
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